Avalon's Lichter and GSK's Cardon

Avalon Ventures, legendary for generating excellent returns for investors in the risky life science industry, will find the technology, provide management and make sure the fledgling companies meet their milestones. GlaxoSmithKline will provide expertise in drug development and clinical testing.

London-based GlaxoSmithKline will provide up to $465 million to finance the companies and will have the option to purchase any that succeed. Avalon will provide up to $30 million in funding.

The deal takes advantage of San Diego’s expertise at nurturing young life science companies, which often grow to a point where larger companies such as GlaxoSmithKline buy them.

It also marks a new chapter in the often-contentious relationship between big pharmaceutical companies and biotechs. The so-called big pharmas increasingly believe that biotech companies, not their own internal research, have the potential to supply the drugs of the future.

Under the deal, Avalon will identify promising new technologies for drug development. A joint committee of GlaxoSmithKline and Avalon will then decide whether to establish a company based on the technology. Both Avalon and GlaxoSmithKline will fund the companies; GlaxoSmithKline’s contributions will be linked to milestones.

Avalon, founded in 1983, started with a $400,000 fund that returned 10 times its investment. Avalon’s newest fund, which raised $200 million, is the firm’s 10th. It was formed last August.

Avalon’s specialty is getting close to innovation at its source, the academic professors who develop scientific advances. That’s a dangerous strategy financially but potentially very profitable.

Kevin Kinsella, Avalon’s founder, pioneered the company’s approach. Intellectually restless, Kinsella has said he tried retirement and found it boring. While traditional strategies would advise waiting to reduce the risks, Kinsella has shown that early-stage investments can produce high rewards.

Meanwhile, biotechs have experienced a relative financial drought. Their historic strategy of raising money through public offerings has faded, because the stocks of many public biotechs have languished. And big pharma partnerships have proved troublesome. To a large drug company, ending a deal is a minor matter. To a biotech, the end of an alliance can endanger its existence.

In response, some biotechs have resorted to a “virtual” model that outsources everything possible, reducing their fixed costs. The Avalon deal envisions following that course, said Jay Lichter, Avalon’s managing director, and Lon Cardon, GlaxoSmithKline’s senior vice president for alternative discovery and development and R&D. Licther and Cardon were interviewed at the BIO convention.

Avalon has about 20 employees working for six companies, Lichter said. Avalon will add about three to four employees with each new company formed, and GlaxoSmithKline will “mirror” that approach. Functions that don’t require employees will be contracted out.

The deal is an example of the creative ways big pharma companies are seeking to get access to early-stage research, said John Mendlein, chief executive of San Diego-based aTyr Pharma.